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NEWS & MUSINGS ON LA TECH STARTUPS

Category Archives: E-Commerce

It’s almost been two years since I co-founded LA-based accelerator MuckerLab and since then, I’ve gotten pretty good at lying.

Not the “pants on fire” kinds of lies, but more like “Pretty Little Liars” ones. These are the types of lies that VCs and accelerators dole out to entrepreneurs because they are somewhat true, mostly innocuous, often keep people from crying, but are most definitely misinterpreted by entrepreneurs.

A refresh of an old post from my now-defunct personal blog from 2008 (ya 2008!) . . . on how to build liquidity in marketplaces

Many investors love “disruptive” businesses. This is in part because these businesses are unencumbered by legacy constraints that had previously been hardwired into the companies and industries these startups are trying to disrupt. One such business model is the “online marketplace,” an entirely new business category not possible (at scale) before the Internet.

During the first dot com era, marketplaces were all the rage – with eBay leading the charge. By the end, 99 percent of the B2B marketplaces had cratered and only B2C eBay was left standing and thriving.

The prevailing consensus at the time was that B2B marketplaces were too hard (e.g. it’s really a software business, not liquidity driven) and that B2C marketplaces could not be built under the giant momentum of eBay’s “network effect.” Investment stopped, and entrepreneurs focused on other categories.

Creating a liquid and vibrant marketplace is already hard enough; fine tuning a business model, and eventually getting paid for the value that has been created by the marketplace is just as complicated and perilous. There has been a lot of talk on the “take rate” a marketplace business can eventually sustain and justify. In general, there is a direct and positive correlation between the strength of network effects achieved and the take rate that can be sustained, as well as a negative causation between initial take rate and subsequent network effects that can be realized. As a result, it is better to achieve network effects first before trying to optimize for maximum take rate/commission in a marketplace. (Note to VCs: don’t judge the revenue potential of a marketplace business based on its initial take rate.) In fact, at eBay it was common practice to launch a commission/fee free marketplace in a particular geography and wait for liquidity and network effects before imposing any type of fee structure on the business. Continue at PandoDaily. . . .

At some point in the life cycle of any successful company, it will have to abandon what made it successful in the first place. In the search for growth, the original customer, the initial wedge entry point, the early adopter will, by definition, will have to be left behind for the larger and more mainstream market opportunity. Today’s eBay looks vastly different than the eBay of the early 2000′s. Today’s eBay is dominated by discounted commodity goods or in-season products. Auction is no longer the main focus of the company. There is not a lot of trading, mostly just selling and buying. The level playing field is long gone (where small/individual sellers were given the same fees and the same visibility as a top sellers). The hard core collectibles enthusiasts (without beanie babies, there would not have been an eBay) still use eBay only because the lack of alternative, but the community that defined it in the past has evaporated. In the early days, eBay was a giant forum/message board with a marketplace attached to it (eBay’s message boards used to get as much traffic as its marketplace). Today, when people talked about the convergence of commerce, community, and content, they forget that eBay was the original user generated superstar.

But that playbook can only take the company so far as it had begun to saturate its initial market back in 2005. It took eBay almost 5 years (2006 – 2011) to pivot into the NEW eBay, a merchandizing and payments juggernaut capable of taking on Amazon. It was a long, hard, and gut wrenching turn around – eBay have to give up its first love in order to play with the big boys. It was the right decision combined with case study worthy execution. eBay is now growing and becoming relevant again – John Donohoe is an amazing operator and strategist. But to do so, eBay has left its billion dollar flank wide open for a new entrant to recreate the community and passion that had defined it in the first place.

Panjo had its public launch and funding announcement today. Spark Capital (of Twitter, Tumblr, and FourSquare fame) is leading the round because they believe in the vision and the the ultimate billion $ opportunity. In the vacuum that eBay has created, fragmented forums have taken its place as a place for enthusiasts and hobbyist to both talk about and trade with each other their passions. But that trading experience is still fragmented and sub-optimal – almost web 1.0 ish for the lack of a better term. As a result, Panjo is actively partnering with forums in order to go to where these interest based communities already are and leverage existing network effects where it exists. In almost 3 month since it started rolling out its solutions to partners, Panjo has achieved $500K in monthly GMV (marketplace speak for gross merchandize volume) – an almost unheard of ramp rate in the history of transactional marketplaces.

As a long time forum nerd (MBWorld, Watch U Seek, Bhuz), I’m excited to not have to spend days sending private messages back and forth, pulling up excel just to calculate paypal fees that sellers refuse to pay, emailing sellers to get an shipping tracking number, complaining to moderators when something goes bad . . . just to buy my favorite W208 aftermarket parts. As an investor – I’m looking forward to seeing the flywheel gain more momentum, Chad & Co execute to perfection as he has always done, and beating up Chad along with with Andrew Parker of Spark . . .

It has taken a long time for the dust to settle from the battle for first generation e-commerce supremacy (Amazon.com and select smart brick and mortar guys won). Fifteen years later, a confluence of macro trends on and off the Web have created a tidal wave finally strong enough to birth a whole new generation of new e-commerce companies. Comparatively, in the same 15 years, the online photo market went through almost 4 generations of battles won and lost: Photobucket -> Flickr -> Facebook (->?) Instagram.

Skills sets that used to exist in very different fields but necessary to win in retail and e-tail has finally converged into the same “entrepreneur,” including online acquisition, merchandizing, user interface and supply chain management.

There is no doubt that mobile is going to be more than 50% of internet usage within the next 18 month. The problem is that consumer adoption has gotten way ahead of the industry’s ability to innovate and capture value . . . and the worst part is that the gap continues to grow. I’ve bitched about this problem a while back but I never expected the problem to get worse. Seems like not a day goes by that a web giant gets their market cap cut off at the knees because of the shift of their userbase to mobile (Google, Facebook, Zynga, Pandora etc). Let me count the ways. . .

Mobile commerce has largely been a mirage. Only the very few and the very large e-commerce companies has been able to actually make their mobile users “buy” on a mobile device. This is because despite of Apple’s protests, mobile has largely been a content consumption device – the very act of getting users to input credit card number and data to buy something has become a near impossible task. (try typing 16 consecutive numbers on the iphone without out screwing up – especially when predictive auto-correct is useless.) Only the very largest sites can leverage their existing user base (from online) to get them to login (a comparably easier task) and use existing credit card information they’ve stored to skip the credit card step. As a result, the long tail of mobile commerce has yet to appear – small e-tailers are not moving to mobile, and innovation around mobile commerce has slowed to a crawl. (side note, where is Apple & Paypal when you need them?)

Mobile advertising is also broken because neither direct response advertising nor branded advertising have truly scaled. When the internet world collapsed in 2001, the internet economy got back on its feet because; as it turns out, the web is a great place to advertise when you have something to sell. It all started with GoTo and scaled with Google. Despite the economic down turn, e-commerce companies and lead gen companies went head long into search and even display advertising to help create a “pricing” floor for most web based advertising inventory. Mobile, because of the difficulties of entering contact information and credit card information, simply haven’t attracted a significant number of direct response advertisers that are looking for direct ROI on their advertising spend. Because of the lack of a pricing floor, most remnant and network driven mobile inventory CPM’s has cratered in the last 18 month (plus the explosion of mobile usage also created a glut of inventory.)

On the top end of the advertising market where brand advertisers spend their $15 to $35 CPM’s, mobile is struggling as well. The original thesis around brand advertising was around addressability, engagement, and targeting. Turns out, brand advertisers want non-standard ad creatives and integrated marketing campaigns on mobile, just like that did online (hmm… should have guessed that one) – the addressability stuff is cool but not as interesting as whole screen take over, exploding, dripping, spinning ad units. The problem is that mobile screens are so small that it is really really hard to create the type of branded campaigns that advertisers (and users) love. With Apple taking away UDID – the addressability / targeting value proposition is eroding as well. And thus the premium mobile inventory pricing continue to drop.

If you cannot make money by selling advertising space on your mobile app or website, maybe, just maybe you can sell your app on either one time or subscription basis? Well, the mobile app economy is pretty dysfunctional too. It’s pretty common for a developer/publisher to charge $30+ for a desktop application or game (go visit Fry’s or Gamestop) – but in the android and apple app store, if anyone tries to charge anything above $5, people screams highway robbery. The lack of true breakthrough revenue opportunity for developing mobile apps has given publisher very little incentive to advertise and build “franchises” that can charge a premium price . . . it’s a self-fulfilling prophecy. Even worse, Apple’s insistence on taking a huge cut of both onetime as well as recurring revenue from publishers effectively created a new virtual socialist state where 30% sales tax is levied on all transactions. Talk about killing innovation and jobs. . .

Now, here is the good news . . . the best and bravest entrepreneurs and VC’s look at structural problems in an industry as opportunities to innovate and exploit. Mobile is only in the 1st inning of reaching its full monetization potential. The first generation of mobile entrepreneurs focused on building companies that played within the rules inherited from the online world. The second generation mobile entrepreneurs will create new rules and platforms indigenous to the mobile world. A mobile ad network that converts. A new kind of mobile only ad unit. A distributed mobile commerce payment network. An alternative application discovery platform. An truly open mobile operating system. Fixing broken platforms = big ass opportunities.

Since the founding of Facebook and Twitter; pundits, VC’s and entrepreneurs have been predicting the second tidal wave innovation to transform the e-commerce business as we had known it. “Social Commerce” was supposed to be the biggest thing since Jeff Bezos turned the web from a replacement for brochures & collaterals into a virtual store front. Six years later, after some fits and starts, and even a few success stories, the reality has not come close to matching the promise once made by all of us. We had imagined a world where social platforms like Facebook would institutionalize word of mouth into a channel so frictionless that infinitely viral (and free!) acquisition machines could be created for every business under the sun that would render search irrelevant or atleast supplementary. That world is not here yet, and perhaps way too ambitious in the first place, but I believe we are only in the first few inning of the game and the potential is still there. For now, we are still chasing, failing, iterating, and . . . waiting.

There is no doubt that social has completely disrupted the content & media business (news, blogs, photos, videos, music etc) – that for increasingly more of these companies, social platforms like Facebook and Twitter has become a larger source of traffic than search. But for e-commerce, it just simply hasn’t been true. Look at round the web today – 99% of e-commerce sites looked pretty much the same as it had tens years ago. Google remains the largest expense line for 99% of e-commerce companies. Some of the most successful companies associated with “social commerce” are not social at all. There is no “Group” in Groupon or “Social” in Living Social for that matter – if there was, they would not need to spend a gazillion dollars on Google every quarter. Most flash sales sites are the same. Outside of incentivizing customer with discounts for referrals; most haven’t been able to create much incremental virality on top of social platforms either. This is not to say that these companies are not game changing; they are, just not game changing in the social marketing context.

There is; however, a bright spot in the social commerce movement – in women’s fashion – an already deeply social (in the offline sense) category. The newest wave of subscription commerce businesses in fashion (ShoeDazzle, BeachMint) and others in more traditional e-commerce (ModCloth) has come close to cracking the nut on social commerce. Polling, incentivized sharing, loyalty rewards, crowd sourced designs, celebrity marketing etc – all work to varying degrees and would not have been possible without Facebook & Twitter. Unfortunately, many of these social marketing strategies are far better for retention than they are for viral acquisition. (Thus the dependence on Google continues.) Even more importantly, outside of women’s fashion, the playbook has yet proven to be effective marketing tactics. Whether the floodgate has finally been cracked opened or women’s fashion will remain an outlier to the rest of the e-commerce industry is still up in the air.

This is not to say that all non-fashion e-commerce businesses should give up on social marketing and advertising. Search will continue to get more expensive and new acquisition channels will need to be discovered for many e-commerce businesses to remain viable. Both Facebook and e-commerce companies will need to continue to experiment and invest in social commerce given the potential for disrupting the existing ecosystem (just look at the media business). Facebook needs to focus on creating new social mechanics and ad product specifically targeted at e-commerce companies – a good place to start would be to institutionalize & productize many of the techniques popularized in women’s fashion to make them more accessible and cheaper to experiment for everyone. (I wanted to add something about Twitter here, but they have to solve a horizontal monetization problem first). E-commerce companies on the other hand need to understand that the low hanging fruit (and the ROI) in social commerce will come from driving customer satisfaction, increasing customer lifetime value, building awareness, and improving brand positioning- not in acquisition. At the very least, treat the social platforms like email – a channel to engage with your existing customers. The utopian future where acquisition, activation, and retention mechanics of an e-commerce business are all built on top of social platforms like Facebook will come . . . but it is going to take longer than we had all expected.

(On the flip side, it also means there are still plenty of opportunities in social commerce for startups to exploit. Both in augmenting the Facebook platform as well as in creating new e-commerce businesses.)